Corporate mileage reimbursement policy
An effective policy is the cornerstone of any mileage reimbursement scheme. A clear, well-structured policy will help remove any doubts and delays when your employees come to file their travel expenses, and ensure your company receives the full tax-deduction benefits on offer.
Some countries have actually made the mileage reimbursement policy a formal obligation. In the U.S., for example, companies are required to create an accountable plan, a framework for the management of business expenses which meets Internal Revenue Service (IRS) requirements. One of the key requirements of the accountable plan is that all payments are properly claimed and documented.
But even if your national revenue agency does not have this requirement, you should still ensure that your mileage reimbursement and wider business travel policy is well-defined for your people. There are all kinds of potential pitfalls when it comes to business expenses, and you owe it to your employees to clarify as many doubts as possible.
In this guide we’re going to explain how to write a full and effective mileage reimbursement policy document, so any of your employees knows exactly how to claim for using their personal vehicle. We’ll also signpost some samples at the end, so you have templates available if needed.
1. Introduction to mileage reimbursement
Your introduction should set out the core principles of mileage reimbursement, making the following points clear:
- That mileage reimbursement extends the benefits of business travel compensation to employees using their private vehicles for business use.
- That the term ‘personal vehicle’ can include cars, vans and bikes – as long as they are registered to the individual making the claim (the term does not include company cars or vehicles for hire).
It is also worth noting, clarifying, right at the outset, exactly what constitutes a business trip when using a personal car or other vehicle. You can make the following points in your definition:
- The normal commute (the journey between home and work) does not count.
- The journey must be useful to the business and its everyday activities.
- Trips must have a primarily business purpose. If an employee has simply bolted a business errand onto a personal trip, that doesn’t qualify for reimbursement.
Top Tip: Use the definitions provided by your national revenue agency here. The IRS, for example, has issued a clear definition on what constitutes reimbursable business travel, stating that it must be 1) Ordinary, meaning it is common and accepted in the trade or business, and 2) Necessary, meaning it is helpful and appropriate.
2. Provide specific examples
Ok, so you’ve given your people a broad-brush overview of what constitutes a tax-deductible trip. Now let’s go a bit further and provide specific examples of exactly what constitutes business travel.
Below you can find a list of some of the trips which meet the criteria.
- Visits to client sites.
- Meetings with both current and prospective clients.
- Meetings with the company’s equipment, furnishing or software suppliers.
- Visits to the homes of company executives for meetings.
- Trips to buy essential supplies for the business.
You can include this list in your own policy document, or personalise it to your company’s own circumstances (for example, you might want to name some of the client sites that your people might visit).
It’s also worth providing real-world examples to show employees what they can claim, and how to deduct things like commuting. Here’s a very simple example:
An employee drives to a conference and back, and the distance is 50 miles each way. The employee’s normal commute is 10 miles each way, so 20 miles must be deducted from the reimbursement claim. In this case, 80 miles can be claimed.
Top Tip: The more examples you can provide, the better here. People often respond better to anecdotal examples than they do to theoretical notions, especially when discussing a subject as complex as reimbursable business expenses!
3. How the rate is calculated
Once you’ve set out the broad terms of your mileage reimbursement scheme, it’s important to tell your employees how their compensation will be calculated.
Most companies use an approved per-mile rate from their national revenue agency, which takes into account all the costs involved in running a car – both fixed and variable. This is often called the standard mileage rate. In the U.S., for example, the IRS rate is currently 56 cents per mile.
You don’t have to use the standard mileage rate, however. In the U.S. you can use what is known as the Fixed and Variable Rate Allowance (Favr), which provides a core monthly allowance supplemented by variable payments which are tailored to the actual costs in the driver’s local area (the price of fuel, the cost of repairs etc).
But whether you use the standard mileage reimbursement rate or an alternative like Favr, it’s important to tell your employees exactly what it involves. If you’re using the standard mileage rate, let your people know that it covers the complete costs of each trip (tax, MOT, depreciation etc), not just the price of fuel. If you’re using an alternative, explain what it does and doesn’t involve.
As an added bonus to your employees you may wish to include sample calculations in your policy document. If you’re based in the U.S. and using the IRS mileage rate, an example would be:
If you travel 1,000 miles in the financial year, multiply 1,000 by 0.56
So the total claim is $560
Remember: you can set your own mileage reimbursement rate if you wish. However if you decide to exceed the standard mileage rate, you should let your employees know that the payments will be classified as taxable income and thus will no longer be deductible. If you go below the approved rate, your employees may be able to claim the difference in their personal tax return (in the UK, for example, taxpayers can claim Mileage Allowance Relief, a form of income tax relief). Your policy should provide instructions on how to do this.
Top Tip: If you’re using the standard mileage rate, think about those related expenses which aren’t included, such as parking tickets and congestion charges. Give your employees specific advice on whether these costs are reimbursable and if so, how to file the expenses.
4. How to submit mileage reimbursement claims
Ok, now your employees know their rights and responsibilities, you can show them how to file their business mileage claims.
We recommend that you ask your people to keep a detailed mileage log to record their own-vehicle business journeys, which they can use when filing their expense reports. The IRS requires four key details from mileage reimbursement claims, and it’s good practice for employees to guard this information even if they’re not based in the U.S.
- The time and date of each journey.
- The total number of miles covered (odometer readings can be useful for mileage tracking).
- Their destination.
- The reason for the journey.
Top Tip: Create a standard mileage reimbursement form for your employees to fill out when claiming their business miles expenses. That way all your claims will be filed in a uniform manner.
Before we go, here are a couple of useful mileage reimbursement policy templates to help you formulate your own document.
This policy, from C3 Industrial, provides a couple of very clear examples of what constitutes a reimbursable expense, and also lists the trips which can and can’t be claimed.
Then there’s this one from the University of Minnesota, which goes into more detail on the potential trips that employees can make in their personal vehicles, and breaks down which parts of the journey are eligible.